ECON101 Unit 11

Question 1

What is monopolistic competition?

Answer 1

A market structure where a large # of firms compete

Question 2

With many firms.. what implications arise?

Answer 2

1) Each firm has small share of the market
2) No firm can dictate market condition
3) Collusion is not viable
4) Firms are independent of each other

Question 3

How can differentiated products look?

Answer 3

• Actual differences
• Perceived differences
  ex. Heinz ketchup (convinced its the best)

Question 4

What does product differentiation enable firms to compete in:

Answer 4

Can compete in

• quality (design, reliability)
• price
• marketing
  ex. gucci vs walmart

Question 5

Is there free entry into monopolistic competition?

Answer 5

Yes there is free entry or exit

- This does not mean free of cost

Question 6

What is the goal of monopolistic competition in the long and short run?

Answer 6

Always maximize profits
In long: Make 0 economic profit
In short:
Firms make profit, more enter, cutting profit
Firms incur loss, more exit, increasing profit

Question 7

What are characteristics of monopolistic curves?

Answer 7

• downward sloping
• demand curve not perfectly elastic
• the less differentiation and more rivals, the greater elasticity of demand
• closer the situation comes to pure competition, the more elastic is the demand curve

Question 8

How can price be set?

Answer 8

Firms can elect to raise or lower price

Not much price competition as competition comes mostly in product differentiation

Question 9

What are the key differences of monopolistic competition and perfect competition?

Answer 9

1) Excess capacity = produces less than quantity at which ATC is a minimum
2) Markup = amount at which price exceeds marginal cost

Question 10

Differences between monopolistic and perfect in the long run?

Answer 10

Monopolistic:

• operates with positive markup
• downward sloping demand curve

Perfect:

• no excess capacity, no markup
• perfectly elastic demand curve drives this

Question 11

Why must monopolistic firms have product development?

Answer 11

• To keep profit, must be in this state constantly as it will give a competitive edge
• Innovation is costly but increases total revenue
• Firms pursue until MR from development equals MC from innovation

Question 12

How does advertising work to increase profit?

Answer 12

• Though they increase costs, they change demand to be more elastic
• Advertising can shift the ATC curve upward but a firm can operate at a larger output to lower this
• It can also shrink the market

Question 13

What are two ways of advertising?

Answer 13

Signal = informed person to inform others signal high quality
Brand names = provide info about quality and consistency